Global money flows

The firmer interest-rate environment in Europe and the U.S. could be a factor for Latin investment flows.

“There is a liquidity restriction at the international level,” Coutino explains. “With the tightening of monetary policy in the U.S. and Europe, there are less funds available for emerging markets.”

Nonetheless, global money managers continue to extend into emerging markets, including Latin America, especially given the continuation of carry-trade opportunities as players search for yield.

There was a quick exodus from Latin American assets in May and June 2006 amid the global retreat in equities. Although Latin currencies have bounced back since that sell-off, many of them have not returned to their pre- June levels.

“We saw a big wash-out last May and June, but since then the markets have stabilized and we’ve seen more interest in the last few months in the carry trade,” says Wardle, who points to Brazil, Argentina, and Mexico as favored plays in the carry trade.

Ideaglobal’s Alvarez echoed, “For the carry trade, the currency of choice is the Brazilian real, and to a lesser extent the Mexican peso. There is still a very interesting currency differential left in the real.”

“We are still seeing a lot of search for yield in the investor community,” Estebanez says. “Investors like emerging market exposure, and there are a fair amount of flows directed at Latin America.”

After the massive wave of presidential elections in Latin America in 2006, political risk is expected to be minimal in 2007.

“The new leftist governments do not seem to threaten the macroeconomic discipline, with only very few exceptions, led by Venezuela,” says Moody’s Economy.com’s Coutino. “Markets have learned that the new Latin left does not represent a risk, as long as they do not try to reverse the free-market model.”
Let’s take a closer look at the region’s leading currencies, the Brazilian real (BRL) and the Mexican peso (MXN).